New short-sale guidelines expected to unclog bad mortgage backlog
The new Federal Housing Finance Agency short sales guides for the government-sponsored enterprises Fannie Mae and Freddie Mac are now in effect.
The guideline’s impact on mortgage servicers so far are seen as positive, given that the program seeks to avoid foreclosures and is helpful to borrowers, servicers and the housing market, said senior executive Ghazale Johnston of Accenture Credit Services.
One of the biggest delays in the short sale process is obtaining all the appropriate approvals necessary to move forward with the transaction, Johnson said. Given the high number of delinquent loans with mortgage insurance, the MI providers getting on board is clearly a critical part of the approval process.
“If this agreement streamlines the approval process and enables servicers to accelerate the short sale or deed-in-lieu process, it should help unclog the backlog of delinquent loans,” Johnston added.
Short sales are a practical option for potential homeowners who are going to default regardless of loss-mitigation efforts. People tend to leave the property in a less damaged state when compared to a foreclosure-type eviction. Critics argue the $6,000 cap on second-liens is unreasonably low, especially in five-figure debt situations. The second-lien holders may wish to hold the debt to attempt recovery, for example, but are now forced to settle for less reimbursement.
"Our understanding from conversations with market participants is that second liens associated with non-performing first liens trade in the range of 10-15 cents on the dollar," Morgan Stanley (MS) researchers said, "while it is yet unclear how borrowers will respond, we note that the offer of $6,000 is towards the higher end of the current market."
However, considering the new agreements will provide a faster process for closing housing deals, this is something many Realtors and prospective buyers will be quicker to adopt.
“This agreement will hopefully demonstrate to the public that the financial institutions involved in administering short sales are indeed trying to make it easier for borrowers to consider these properties,” Johnston said.
While the agreements are a step forward, Johnston said the guidelines aren’t a ‘slam dunk.’
“This agreement certainly provides some relief, but there are still many other steps and third-party approvals (i.e. second lien holders) required with a short sale or DIL,” she said. “Servicers still are responsible for managing a multi-step process to ensure the short sale is properly executed and that can be a challenge.”